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Restrictive Covenants - When to enforce

Virtually all franchise agreements contain restrictive covenants but when a franchisee breaches them, a franchisor has to decide whether to enforce them or not. Here we consider the pro's and con's of enforcement.

Pro's:

The covenants will usually protect the Territory against the outgoing franchisees competing, this affords you an unchallenged opportunity to re-sell the Territory.

Enforcement sends out a strong message to the network that the Franchisor will, if necessary, enforce its rights. This encourages compliance on the part of other Franchisees.

Enforcement can protect know-how, confidential information and client/prospect lists, protecting the business concept from exploitation by others.

Many franchise agreements contain indemnities to the Franchisor from the Franchisee in the event the Franchisor has to take enforcement action - thus Franchisors can often recover their full legal costs of enforcement. If there is no such indemnity, the court will usually award the successful party the majority of their costs.

Damages are often awarded as part of an enforcement claim - enabling the Franchisor to seek recompense for losses caused by breach

Con's:

Enforcement action can be expensive and costs are not always recoverable - especially if the Franchisee has limited resources

Enforcement action can be time consuming and a significant distraction from day-to-day business activity.

Outgoing Franchisee may have limited resources and be unable to satisfy any order for damages or costs

Possibility of negative perception from Franchise network if action considered heavy handed.

Above all - enforcement requires careful thought and decisive action - the courts can decline to enforce a covenant in the event of delay in action to enforce it. A quick assessment needs to be made of the threat faced, the resources of the breaching party, the bigger commercial picture (i.e. the message sent to other members of the network) and thought given to the impact on the franchisor's time and resources.